Here’s a look at the pluses and minuses for those entrepreneurs and their prospective investors.
The good news for entrepreneurs: Self-certification and flexibility
There was plenty to be pleased about last week for entrepreneurs hoping to take advantage of the new crowdfunding rules. Most importantly, regulators proposed making investors responsible for tracking how much they are allowed to invest under new crowdfunding limits (more on that in a moment). Some had feared the SEC might put that onus on the firms or the funding portals.
In addition, the proposal would not count crowdfunding investors toward a company’s owner total, Once a company has more than 2,000 people with ownership stakes, businesses are no longer considered a “microcap” company and must register with the SEC.
The exemption therefore “decreases the level of compliance and regulatory burden crowdfunding will impose on companies,” Richard Swart, director of research for the Innovation in Entrepreneurial and Social Finance program at the University of California at Berkeley, wrote in a blog post about the proposal.
Ryan Feit, a board member for Crowdfund Intermediary Regulatory Advocates (CFIRA), which lobbies for the crowdfunding industry, noted that the original law seemed to imply that firms would have to establish a specific funding target and either raise exactly that amount or nothing at all.
However, regulators have “implemented some flexibility,” he said, allowing entrepreneurs to set minimum and a maximum fundraising goals.
“Now you could say ‘I want to raise at least $250,000 but I’ll take all the way up to $750,000 if there is more demand from investors,’ ” Feit said. “That’s very important they added that in there.”
The bad news for entrepreneurs: Audit and annual filing requirements
Some are concerned that a couple new regulatory hoops could undermine the law’s intent, potentially deterring entrepreneurs who might have thought about crowdfunding.
The first is a requirement that all firms raising more than $500,000 a year (or less than a maximum $1 million) must provide audited financial statements. The proposed rule is meant to protect investors from oversized scams or losses, but some worry that a full audit will prove too costly for promising young firms, particularly those that are not yet generating revenue.
“That could put a real freeze on companies looking to raise more than a half million dollars,” Jason Best, one of the founders of Crowdfund Capital Advisors, a consulting firm for investors and entrepreneurs, said in an interview.
Comments